Stocks Bounce Back in Choppy Trade, Dollar Dips: Markets Wrap

(Bloomberg) -- US stocks swung between gains and losses as investors assessed prospects for growth in a rate-hiking cycle aimed at taming stubbornly high inflation. The dollar fell and Treasury yields rose. 

The S&P 500 ticked higher after falling as much as 0.4%. Shares had their biggest drop in more than two years Tuesday, with the benchmark falling more than 4%, after shock consumer-price data prompted investors to reassess the outlook for interest rates. A gauge of the dollar retreated Wednesday after the biggest one-day jump in three months on Tuesday. The 10-year Treasury yield rose about three basis points.

While the magnitude of Tuesday’s rout was impressive, the S&P 500 only reversed most of the gains made in the previous four sessions. The lack of a surge in the VIX index -- known as the “fear gauge” -- suggests that the selloff was a recalibration of those expectations rather than panic selling. 

“History tells us that whenever we have had a 4% one-day decline, we usually see a bounce of about 1% the day after,” Sam Stovall, chief investment strategist at CFRA Research, told Bloomberg Television’s Surveillance on Wednesday. “But then we sort of trade sideways for the next month before resuming an uptrend three months down the road. Investors just have to hold onto their hats right now.”

Swaps traders are now pricing in a hike of three-quarters of a percentage point when the Federal Reserve meets next week, with some wagers appearing for a full-point move. The two-year Treasury yield, the most sensitive to policy changes, rose four basis points after jumping as much as 22 basis points Tuesday, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning.

“The biggest and growing downside risk for the market is increasing recession risk as the Fed aggressively tightens into a slowing economy,” Keith Lerner, co-chief investment officer at Truist Advisory Services, said in a note. “On the other side, there is at least one partial offset: Investor expectations are low and already braced for bad news.”

The Stoxx Europe 600 index slipped less than 1%, extending Tuesday’s 1.6% drop. Utilities were the among the worst-performing sectors as the European Commission considers plans to contain the energy crisis, which may include revenue caps. 

The yen pulled back from a slide toward the key 145 level versus the dollar after a Nikkei report that the Bank of Japan conducted a so-called rate check with traders to see the price of the currency against the greenback. The finance minister warned he wouldn’t rule out any response if current trends continued. The country’s 10-year bond yield rose to 0.25%, the upper end of the central bank’s policy band.  

Bitcoin nursed a drop of almost 10% on Tuesday, the biggest decline since cryptocurrencies plunged in June. 

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Here are some key events to watch this week:

• US business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday
• China home sales, retail sales, industrial production, fixed assets, surveyed jobless rate, Friday
• Euro area CPI, Friday
• US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.4% as of 10:45 a.m. New York time
• The Nasdaq 100 rose 0.7%
• The Dow Jones Industrial Average rose 0.2%
• The Stoxx Europe 600 fell 0.8%
• The MSCI World index fell 0.3%

Currencies

• The Bloomberg Dollar Spot Index fell 0.3%
• The euro rose 0.2% to $0.9986
• The British pound rose 0.7% to $1.1568
• The Japanese yen rose 1.4% to 142.58 per dollar

Bonds

• The yield on 10-year Treasuries was little changed at 3.40%
• Germany’s 10-year yield declined three basis points to 1.70%
• Britain’s 10-year yield declined four basis points to 3.13%

Commodities

• West Texas Intermediate crude rose 2.1% to $89.17 a barrel
• Gold futures fell 0.2% to $1,713.80 an ounce

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